Lessons from the UK electricity pricing review

Industry Perspectives

Internationally renowned regulatory economist Martin Cave was in New Zealand this month to share insights from the UK’s retail electricity pricing review. 

Commissioned by the UK Competition and Markets Authority (CMA), the study found compelling evidence that 70 percent of households were paying substantially more for electricity compared to a smaller group of ‘engaged consumers’. 

These consumers were engaging in ‘search and switch’ tactics to scoop up better deals, while the bulk of the disengaged population remained on default tariffs, and paying much higher prices. 

Most concerning to the study was this group of ‘disengaged customers’ were typically disadvantaged – meaning they were more likely to be poorer, less-educated and without access to computers or other means to shop around for a better price.
  
“We found the injury to these consumers was significant because some were paying as much as £300 ($577 NZD) per year more for their electricity compared to those people who were actively looking for competitive deals. The total detriment to households was roughly £1.4 billion ($2.6 billion NZD) per year.

“The disengaged consumers were victims of unilateral market power wielded by their individual large supplier,” Cave said.  

To strike a better balance for all consumers, the CMA favoured measures to boost consumer engagement and remove parts of the regulation that hampered true competition. 

It also put a temporary ‘safeguard’ cap on the rates for pre-pay energy customers who were suffering from excessively high prices due to the fact there were so few suppliers competing for their business.
 
In the two years since the UK review concluded, engagement in the form of supplier switching did increase, with the share of customers on the higher tariffs falling from 64% in April 2016 to 57% in October 2017. 

However, over this period the gap between the cheapest tariff and the average tariff paid by disengaged customers remained at about £300 per year.  

In response to that, the UK Government brought forward legislation requiring Ofgem, the sectoral regulator, to impose a temporary price cap on all tariffs to which customers can be defaulted if they do not choose an alternative. “We’re now expecting these price caps will take effect in late 2018,” said Cave.  
 
Cave’s visit coincided with New Zealand’s own electricity pricing inquiry, which is investigating whether the market here is delivering efficient, fair and equitable prices to Kiwis.

Smaller independent retailers and consumer groups have been questioning whether similar problems around customer engagement and market power exist in New Zealand, particularly regarding ‘save and win-back’ behaviour.

the customer retention strategies of the big electricity providers mean customers who think about shifting get better deals than those who stay put, or who are otherwise ‘disengaged'

Electric Kiwi CEO Luke Blincoe


 “These loyal customers get no benefit from competition, their prices are likely to be higher, and there is a lost opportunity to create downward pressure on price.” 

When asked what New Zealand could learn from the UK study, Martin says the key will be to identify the key issues quickly.

“This will be easier to do if you can reference a reliable set of data that shows the true shape of the market,” said Cave. “In the UK we conducted interviews with 7000 households to discover exactly what they paid for electricity and if they had ever switched supplier. 

“It was an eye-opener because we could see in plain sight the substantial difference in costs between engaged and disengaged consumers, and the reasons why some were not engaging. 

“Most worryingly was the discovery that the disengaged customers consisted disproportionately of low income consumers. We could see very clearly early on that there were substantial faults in the way the market was working, and that this should to be the focus of our review.”  

“The New Zealand inquiry should then be able to identify a set of remedies which addresses problems if any are to be found, these may include demand-side and more intrusive supply-side measures or another intervention that we don't yet know of,” said Cave.  


Click here to read Martin Cave’s full paper: Retail Lessons for New Zealand from the UK Energy Market Investigation.

From left to right: Greg Houston, Professor Martin Cave and Luke Blincoe.
 
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